Comcast’s Race for Customers May Spur $170 Billion Deals

David Cohen, executive vice president of Comcast Corp., left, speaks during a House Judiciary Subcommittee hearing with Robert Marcus, chairman and chief executive officer of Time Warner Cable Inc., in Washington, on May 8, 2014. Photographer: Andrew Harrer/Bloomberg

May 14 (Bloomberg) -- Comcast Corp.’s bid to buy Time
Warner Cable Inc. may be the opening act for a yearlong festival
of telecommunications deals that would alter Internet, phone and
TV service for tens of millions of Americans.

AT&T Inc. and DirecTV may be the next dance partners. AT&T
is in advanced talks to acquire DirecTV for as much as $50
billion, according to people familiar with the matter, who asked
not to be named because the talks are private. After that, in
June or July, Sprint Corp. and T-Mobile US Inc. may bring a $30
billion merger before U.S. regulators, people said last month.

All told, the three deals could total more than $170
billion in equity and net debt and affect more than 80 million
U.S. customers. The slew of transactions -- announced and
prospective -- reflects companies’ desire to get bigger to keep
pace with surging broadband growth that requires faster Internet
speeds and new methods of transmitting video on all devices.

“While the Comcast/TWC deal was the trigger, the backdrop
of a slow macro economy, new competitors, shifts in technology
and consumer habits all come together and force the need for
more scale,” said Todd Lowenstein, a fund manager at Highmark
Capital Management Inc. in Los Angeles.

AT&T’s deal for DirecTV would merge the second-largest U.S.
wireless company with the second-largest U.S. pay-TV provider,
potentially accelerating the convergence between video
distribution and wireless.

Online Video

The purchase would give AT&T a national satellite-TV
provider to combine with its wireless, phone and high-speed
broadband Internet services as competition ramps up. The pool of
pay-TV customers is peaking in the U.S. because viewers are
increasingly watching video online, and the combination would
keep DirecTV from being on its own with just a TV offering and
no competitive Internet package.

Comcast’s proposed $45.2 billion acquisition of Time Warner
Cable in February, and subsequent deal with Charter
Communications Inc. last month, served to underscore the threat
posed by the changing video distribution business, Walt Piecyk,
an analyst at BTIG LLC, said in an interview.

Competitors such as DirecTV and Dish Network Corp.
recognize that a combined Comcast-Time Warner Cable will have
the ability to move aggressively into delivering video through
the Internet, which may soon supplant cable and satellite
technologies, Piecyk said. That evolution is forcing incumbent
businesses to evaluate their models, or seek mergers.

“The video distribution business -- the way pay-TV works--
is changing and so is the role broadband plays in that, both
with landline and wireless,” Piecyk said.

Wireless Solutions

Already, the cable industry has aligned to build a
nationwide network of more than 250,000 Wi-Fi hotspots that
could lead to new services including a mobile system competing
with AT&T and Verizon Communications Inc. The cable companies
participating include Comcast, Time Warner Cable, Cox
Communications Inc., Cablevision Systems Corp. and Bright House
Networks LLC.

Satellite companies Dish and DirecTV don’t have that fall-back wireless option, leading both companies to consider
acquisitions as a way to transform their businesses.

Dish and DirecTV attempted to merge in 2002, a deal blocked
by regulators. Dish Chairman Charlie Ergen approached DirecTV
CEO Mike White earlier this year to discuss combining again.
Ergen said last week DirecTV has become “too frothy” for the
Englewood, Colorado-based company to make a bid.

Sprint/T-Mobile

Dish, which failed to buy Sprint last year, would be
interested in acquiring T-Mobile if regulators block Sprint’s
efforts, Ergen said. That hinges on whether SoftBank Corp. fails
to win regulatory approval for its plan to buy T-Mobile, which
is controlled by Deutsche Telekom AG, Ergen said last week. The
Japanese wireless company owns 80 percent of Sprint.

To prepare Washington for another telecommunications deal,
SoftBank founder Masayoshi Son’s lobbying firm, Carmen Group,
has again been meeting with elected officials and regulators to
argue the merits of a merger with T-Mobile, according to a
person familiar with the matter.

He might receive a better reception from regulators if they
are already weighing other larger telecom mergers. Still,
regulators may approve the Comcast and AT&T deals while
rejecting a Sprint and T-Mobile combination.

“We are for a competitive marketplace,” FCC Chairman Tom
Wheeler said at an April 23 news conference when asked if he was
concerned Sprint or T-Mobile may fail without a merger.

Early Skepticism

Asked if the wireless market is competitive, Wheeler
replied, “Things change over time. And we believe that what is
extant in the market today in terms of four major competitors is
an important and driving force in the competitive nature of that
market.”

Wheeler’s remarks were “‘incrementally negative’’ because
they indicated regulators’ early skepticism about a Sprint bid
for T-Mobile hasn’t softened, Paul Gallant, Washington-based
managing director with Guggenheim Securities, said in an
interview yesterday.

AT&T attempted to acquire T-Mobile for $39 billion before
regulators rejected the deal in 2011 on anticompetitive grounds.

The Dallas-based company had to pay T-Mobile about $3
billion in cash plus wireless frequencies and a roaming
agreement as a reverse termination fee. Son wants to pay about
$1 billion as a termination fee for a T-Mobile deal this time,
while Deutsche Telekom is pushing for closer to $3 billion,
according to two people familiar with the matter.

Representatives for SoftBank and Deutsche Telekom declined
to comment.

Mobile Video

Distributing mobile video has been Dish’s game plan for
several years, pushing Ergen to acquire billions of dollars
worth of wireless spectrum without a network.

‘‘Data usage is growing at exponential rates and that looks
to continue in the foreseeable future, particularly with the
growth of video which is going to be the biggest use of that,”
Ergen said last week. “We are well positioned strategically and
financially for the changes that are going to develop.”

If AT&T buys DirecTV, the wireless giant could
theoretically bundle its service with DirecTV’s video product,
and in some areas of the country its U-verse high-speed
broadband to the home, to compete with cable, said Amy Yong, an
analyst at Macquarie Group in New York, in a note to clients.

Advanced Talks

DirecTV is working with Goldman Sachs Group Inc. to help
evaluate a potential offer from AT&T. Talks are advanced
although a deal could still fall apart, according to people
familiar with the matter.

DirecTV generates billions of free cash flow by charging
customers about $100 a month for video content, including the
National Football League’s NFL Sunday Ticket.

Buying DirecTV over Dish signals that AT&T is more
interested in the former’s cash flow and Latin American growth
prospects, according to Paul Sweeney, an analyst at Bloomberg
Industries.

Regulators will probably judge each merger on its specific
impact on competition, rather than evaluating them together,
said Blair Levin, a former Federal Communications Commission
official who is now a fellow at the Aspen Institute in
Washington. Neil Grace, an FCC spokesman, in an e-mail declined
to comment on any prospective deals.

“It is possible that the combination of all the rumored
deals could improve competition,” Levin said in an e-mail. “It
is also possible that the combination of all the rumored deals
could create greater moats for the survivors of the game of
musical chairs and create a broadband oligarchy that diminishes
competition.”

Levin suggested that mergers aren’t a secret ingredient to
make American companies great competitors.

“While some deals could have positive impacts, we should
remember the reason Americans still revere Steve Jobs,” Levin
said. “When he brought Apple back from its near-death he didn’t
use the profits from the new line of Macs or the iPods to buy
Dell. He invented the iPhone.”